Cities own carbon trading system in which polluters can buy carbon credits generated by initiatives or organizations that are actively reducing or sequestering greenhouse gas (GHG) emissions.

Instrument category

Municipal own source revenue (OSR) and policy steering instruments

Implementation status

Low - limited evidence available

Enabling conditions and success factors
  • A broad coverage of emissions.
  • A uniform price for all emissions, regardless of the fuel type or the user.
  • Stable and predictable prices.
  • Alignment of prices with carbon reduction targets.
  • Maximizing the benefits – good schemes ensure that they capture revenues raised and use them productively by reducing broader tax burdens or funding socially desirable climate-related projects.
  • Carefully developed compensation schemes for vulnerable households and businesses.
Instrument benefits
  • Guarantees a minimum greenhouse gas (GHG) reduction level from those participating in the scheme.
  • Provides additional revenue for those investing in measures to mitigate their emissions directly.
  • Drives the cheapest options for GHG reduction first (where there is a demand for permits).
  • Long term certainty to members.
  • Flexibility for members in how they meet their requirements.
  • Revenue generation for the government if permits are auctioned.
Challenges and risks to implementation
  • Price of allowances can be vulnerable to unexpected economic factors and disrupt market function (oversupply or low demand).
  • Market-based approach supports the least-cost options, which can narrow the focus of mitigation efforts to a few winning sectors or technologies.
  • Highly profitable projects are often not eligible for support through emissions trading schemes such as the clean development mechanism (CDM).
  • Registration phase for projects can be long.

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